2. Savings accounts and money market accounts are most appropriate for A. Long-term investments like retirement B. Emergency funds and short-term goals C. Earning a high rate of return

3. To reduce the total finance costs paid over the life of an auto loan, you should choose a loan with the A. Lowest monthly payment B. Longest repayment term C. Shortest repayment

4. If you always pay the full balance on your credit card, which of the following is least important? A. Annual interest rate B. Annual fees C. Line of credit

5. The benefit of owning investments that are diversified is that it A. Reduces risk B. Increases return C. Reduces tax liability

6. If you have an insurance policy with a higher deductible, the premiums will be A. Higher B. Lower C. The same

Answers: B, B, C, A, A, B

We already know that aging takes its toll on us physically. For a while, we can almost fool ourselves into thinking the effect is minimal but this illusion is hard to maintain when we use an objective yardstick to measure the decline.

For instance, I feel like I hit the golf ball just as well as I did 10 years ago but my handicap tells me otherwise. Similarly, I don’t run nearly as fast as I could 20 years ago; not that it feels that way but the stop watch doesn’t lie.

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Is it possible that our mental abilities also start to diminish a lot sooner than we think? If we look around us, we can find some objective benchmarks that suggest this is indeed the case.

Take playing chess for example, which seems like a purely mental pursuit. Surely players keep on improving year after year with more experience and practice.

One would think a wily 60-year-old should be able to trounce a callow 20-year-old who has the same potential. A look at the world chess rankings tells a different story. The number one ranked player these days, Magnus Carlsen, is just 22.

Among the rest of the top 10, the oldest is 43 and the average age is 31. The moral is clear: when the results are measurable and totally objective, age makes a big difference.

But maybe chess is special. Maybe the decline in mental agility with age is marginal and the impact is great only in the case of the loftier intellectual pursuits, like grandmaster-level chess or quantum physics. Maybe for more mundane activities, such as managing one’s investments, we can be just as capable at 75 as we were at 55.

A new study by researchers at Texas Tech University and the University of Missouri-Columbia (Fink, Howe and Huston) would argue otherwise.

The study measured the intellectual decline that occurs after age 60. More specifically, the researchers measured the ability of older Americans to answer standard questions relating to investments, insurance and borrowing.

As the authors of the study put it, the test measures “crystallized intelligence” that requires both memory and problem-solving skills.

In the study, a standard multiple-choice test was given to 1,725 people age 60 to 88 with varying education levels.

To give an idea of the difficulty of the test, one question asks: “If your assets increase by $5,000 and your liabilities decrease by $3,000, your net worth would increase by (1) $2,000, (2) $8,000 or (3) $3,000.”

Another question: “Savings accounts and money market accounts are most appropriate for: (1) long-term investments like retirement, (2) emergency funds and short-term goals, or (3) earning a high rate of return.” So the questions were not dead easy but really, anyone managing significant retirement savings should be able to answer them.

The test proved to be more of a challenge than one would think. The average score for 60-year-olds was about 60% correct, which is barely a pass. The real news is how far and how fast the scores fell after age 65. By age 73, the average score was less than 50% and for subjects in their 80s, scores fell below 40%. At age 88, the average score was barely north of 20%.

Here is where it gets interesting. While older test subjects scored quite poorly by any objective or relative measure, their self-assessed confidence in their knowledge kept on rising. People in their 80s were generally more confident in their abilities than people in their 60s, even though scores for the octogenarians were barely half as high.

The knee-jerk reaction is to find fault with the study. This was a U.S. study so could it the results would have been different for Canadian test subjects?

Perhaps, but there is no reason to think so. Maybe the test was somehow biased against older test subjects. Once again, this is unlikely given that the researchers were testing rigorously for bias. Also, the paper cited various other studies that had come to similar conclusions.

Another theory is that performance remains more or less level until some advanced age and then drops sharply because of the sudden onset of a stroke, dementia or other condition. The study provided strong evidence to show that the test scores started dropping at a fairly steady rate from age 70 and on.

The final objection is that not everyone’s mental acuity drops this fast to which the answer is, of course not, but that doesn’t change the result in the typical case.

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The question is what do we do with this information? We could politely turn a blind eye to this politically incorrect phenomenon and hope that seniors somehow muddle through, but that strategy could be dangerous.

Seniors need to make important decisions at various stages of retirement like deciding when to start CPP benefits, whether to purchase an annuity, how to change the asset mix in their RRIF, whether to co-sign loans for their grown-up children and whether to buy long-term care insurance. It is better to deal with issues like this while one is still fully capable and before one becomes overconfident.

The good news is that most of us do not have to worry much while we are in our 60s. Our ability to deal with investment and insurance matters does not really start to wane until about age 70, so this buys us some time. Some decisions that would usually come after 70 could be made in advance by setting out a personal plan and schedule in writing or creating such a plan with the help of an advisor.

For instance, I have suggested in a previous column that it makes sense to purchase an annuity at age 75. Why not put that in the plan now rather than having to rethink that decision at 75? As another example, rather than reviewing one’s asset mix for RRSPs or RRIFs on an ad hoc basis, why not determine in advance how the mix will change over time, or even easier, invest in target date funds? And of course, we should have executed a will long before we get to age 70.

It sounds bleak to say it but we will all find we change with age and not always for the better. Let’s make the big decisions about our retired lives when we are best equipped to do so.

Fred Vettese is chief actuary at Morneau Sheppel and co-author of the book “The Real Retirement” which will be released in January 2013.